Need Help Analyzing

12 Replies

Hi folks, I have been searching for my first investment property and came across this deal in a different town (about 1.5 hrs away). I am not a pro member as of yet so was wondering if someone would help me analyze and come up with a creative way to try to make it  happen. 

Owner is selling apartment complex with 80% of units that have all been renovated and leased up to 80-100% with annual leases. (24) 1 Bed 1 Bath Units with 600SF, and rents for $510 per month, and (4) 2 Bed 1 Bath Units with 800SF rents for $610 per month. This is a small gated community with very reliable tenant base.
Proforma
$177,360 Stabilized Income
-$79,812 Less Expense @ 45%
$97,548 Stabilized NOI

Asking $929,000 Asking price is based off of a projected 10.5% CAP, and there's a renovations allowance for the remaining 6 units of $15,000. For more information on this please feel to call or email.

Any guidance on my possible first deal will be much appreciated.

Seems a little steep on the price to me.

Originally posted by @Bryan C. :

Seems a little steep on the price to me.

 I thought the same but also do not know how to find out what complexes that are comparable are selling for.

I would buy based on actuals, not proforma. If you buy based on proforma, you are buying value that hasn't been added. You are paying for work that you have yet to do.

15k for 6 units sounds like a stretch. If the owner renovated that many units - which 6 do you think he left for last? The easy ones? No

I would assume at minimum 10k per unit of those 6, plus they are not even getting to the heart of the problem: what is the status of the BUILDING....? So many people make the mistake of pouring their money into the unit renovations, with little or no attention to the building other than bandaids. Guess what happens when that roof leaks? Your renovations are ruined.

So you need to find out the age and status of each of the following: roof, doors (exterior and apartment entry doors), windows, siding/brick pointing, plumbing risers and laterals, electrical wiring between the meters and the sub panels, furnaces/mechanicals, attic insulation, basement water/seepage. If any of those are not new, perfect, to code, or greater than "80% of useful life remaining", budget to replace.

Once you've figure that out, then you need to find out collection rates. Its great if 80% of the units are leased, but if 30% of the apartments are a month or more behind, then those units are worse than vacant.

Moral of the story is real estate agents try to sell us on CAP rates and occupancy - but what actually determines the value of the property when looking at a large(ish) multi family is the condition of the building and the responsiveness of its tenants - not simply having tenants with a pulse.

Originally posted by @Travis Lloyd :

15k for 6 units sounds like a stretch. If the owner renovated that many units - which 6 do you think he left for last? The easy ones? No

I would assume at minimum 10k per unit of those 6, plus they are not even getting to the heart of the problem: what is the status of the BUILDING....? So many people make the mistake of pouring their money into the unit renovations, with little or no attention to the building other than bandaids. Guess what happens when that roof leaks? Your renovations are ruined.

So you need to find out the age and status of each of the following: roof, doors (exterior and apartment entry doors), windows, siding/brick pointing, plumbing risers and laterals, electrical wiring between the meters and the sub panels, furnaces/mechanicals, attic insulation, basement water/seepage. If any of those are not new, perfect, to code, or greater than "80% of useful life remaining", budget to replace.

Once you've figure that out, then you need to find out collection rates. Its great if 80% of the units are leased, but if 30% of the apartments are a month or more behind, then those units are worse than vacant.

Moral of the story is real estate agents try to sell us on CAP rates and occupancy - but what actually determines the value of the property when looking at a large(ish) multi family is the condition of the building and the responsiveness of its tenants - not simply having tenants with a pulse.

 All points noted, thank you Travis!

Originally posted by @Jonathan Towell :

I would buy based on actuals, not proforma. If you buy based on proforma, you are buying value that hasn't been added. You are paying for work that you have yet to do.

 Up until now I did not know what Proforma meant. I assume that it means, potential?

Right. Proforma is a projection based on assumptions.

Imagine you found a classic car in a junk yard. It won't run and the body is covered in rust. In its current state, it is worth about $500. If it were fully restored it might be worth $15,000. What if the seller tried to sell it to you for $15,000. Would you buy it? 

Real estate is the same. Only buy based on actual, past 12 month net operating income.

Robert - what has stopped you from becoming a pro member? You'd gain access to some tools, which you obviously need, as is evidenced by the question you asked. Furthermore - be honest, you are getting so much more value out of BP than a pro membership costs. It's just the right thing to do, man.

Makes sense?

The great @Ben Leybovich proves a good point.  the $30 for a pro membership would allow you to work your calculations through the buy and hold calculator and simulate it six ways from Sunday.  It could save you from making (based on this example) a million dollar mistake.

Also perhaps speaking with a commercial broker in your area to gain an understanding of what properties of similar characteristics have sold for.  I'm not sure about your area but in my county this information would also be listed on the property appraisers web site.

@Ben Leybovich , I decided to turn Pro not for any of the tools (which are good, I admit) but because I wanted to give back to BP for all it has given to me. I cannot tell you how much I have gained in wisdom from this site.

It's like the largest REIA in the world, only you don't have to wait for the 20 minutes of Q&A once a month. You get it all the time!

Thanks to the info I've learned here, I'm about to close on my first small multi-family. I'm pretty sure I am buying it right, in a decent neighborhood, and there should be a lot of value in some of the changes I am making. 

I'm going to convert four of the 2/2 into 3/2 for about $5K each. Rents should raise at least $200/month as a result. I don't think I would ever have thought of it had I not found this site.

The children at the complex leave their bikes all over the place. Looks messy. I'm going to put in a bike rack to help solve this problem. BP helped me think of ways to creatively solve this problem. 

I got a book recommendation from the site (Landlording on Auto Pilot by Mike Butler) and I am implementing some of his systems to decrease vacancy and increase revenues.

All of this is well worth the minimal (and deductible) cost of a BP membership! GO PRO!

@Ronald Perich - I concur! Josh had an idea, and he slaved for years not knowing if it'll go anywhere. Today - not only does a gang of 20, or however many of them there are now, youngsters have a nice job, salary, benefits, and a corporate place to call home, but countless, myself included, people making huge amounts of money facilitated by BP. Not to mention the education millions of folks are receiving...

It's truly amazing the opportunity that is BiggerPockets. The least folks can do is spend $300/year, which is just ridiculous, to support the effort. And the experienced folks should all try to give back more than the money. Money is cheap indeed compared to knowledge - I try to give a lot of knowledge...

So - when a newbie posts asking for specific advice, and prefaces that question with "I've not given BP $300 as of yet, it just sort of gets under my skin. This is a community. One for all and all for one. BP facilitates a lot of success, and if you want to be one of those success stories - become a part of the whole. If you don't have knowledge to give, then at least give the price of your pro account. It's just the right thing to do...

You know something, Ron - this is my topic for the blog for next week...

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